Beyond the Bid: Why the Right Contract Structure is Your Financial Shield

The bid isn't the finish line. It's not even close.

You can vet builders carefully, prepare a meticulous bid package, and receive competitive proposals—and still expose yourself to significant financial risk based on a single decision: the contract structure you sign.

Choose well, and your contract becomes paperwork. Choose poorly, and that same contract becomes a weapon.

Where Risk Actually Lives

There are three main models for construction contracts. Each one allocates financial risk differently between you and the builder. Understanding this is more important than shaving a few percent off the bid price.

Lump Sum / Fixed Price

The builder agrees to deliver the entire project for a single, all-inclusive price.

This provides budget certainty, which lenders love. If the builder mis-estimated framing labor or drywall costs, that's their problem. But you'll pay a premium for this protection—builders bake in contingency to cover their risk. And the structure is rigid: any change you make triggers a change order, often marked up significantly. Fixed-price contracts can also create an adversarial dynamic where the builder's profit depends on spending less than they quoted.

Best for projects where design is 100% complete and every specification is locked before signing.

Cost-Plus

You pay the actual cost of labor and materials, plus a builder's fee—either a percentage of total cost or a fixed monthly amount.

This is fully transparent. You see every invoice, every receipt. It's also flexible: if you want to upgrade the windows mid-project or adjust the kitchen layout, you're not fighting a change-order battle. But all the budget risk sits with you. Every cost overrun flows directly to your account. This model requires trust, diligent tracking, and active involvement.

Best for complex projects where scope will evolve, and for owners comfortable managing the financial details.

Guaranteed Maximum Price (GMP)

A hybrid. The project runs cost-plus, but with a ceiling—a guaranteed maximum that total costs won't exceed. Often, savings below the GMP are split between you and the builder, creating shared incentive for efficiency.

You get transparency and flexibility with a cap on your exposure. The builder is motivated to find savings rather than just spend up to the limit. But the GMP will still include contingency, and you'll need to track costs carefully for final reconciliation.

Best for projects where design is mostly complete but you want open-book visibility with a cap on risk.

The Clauses That Actually Protect You

Regardless of structure, your contract needs specific language to function as a legal shield. We recommend starting with a formal, lawyer-vetted template like the standard AIA documents, then ensuring these elements are present:

A detailed scope of work referencing specific versions of architectural drawings—not just "per plans" but "per drawings dated March 15, 2025, revision C."

Payment terms and a schedule of values aligned with your construction loan draw schedule.

A formal change-order procedure requiring all changes to be priced and approved in writing before work begins.

Indemnification language protecting you from liability, plus an insurance clause requiring the builder to name you as additional insured on their policy.

A warranty period—minimum one year for workmanship—with clear language on what's covered and how claims are handled.

Termination rights specifying how either party can exit if the relationship breaks down, and what happens to deposits, work in progress, and materials on site.

The Contract You Don't Negotiate Is the One That Hurts You

Most owners spend months choosing finishes and fixtures, then sign a contract in an afternoon. That's backwards. The contract determines who absorbs risk when things go wrong—and something always goes wrong.

Don't let the excitement of breaking ground overshadow the document that governs everything that follows.